Question text

Rock On Inc. has a job to produce guitars (JOB85) that has work-in-progress of $375,000 and $337,500 on January 1, 2020 and December 31, 2020 respectively. It is the entitys policy to absorb overheads based on direct labour hours. The budgeted overheads for the period were $1,875,000, while the budgeted direct labour hours are 312,500 hours. Additionally, the firm applies a margin of 25%. The following information below relates to JOB85 for the period ended December 31, 2020:

The guitars are made from original cedar wood valuing $3.45 per lineal inch. One guitar used 500,000 lineal inches of lumber. Direct labour amounted to $900,000 with a labour rate of $4.50 and direct expenses was $375,000.

Required:

(a) Determine the production cost of JOB85. (9 marks)

(b) The operations manager at Prestige Bakery budgeted to make 300,000 donuts for the month of November 2019. The company also is expected to use 750,000 budgeted labour hours to produce the same.

However, during the month of November 2019 the company made 322,500 donuts, which took 825,000 labour hours.

Required:

(i) Calculate the efficiency ratio. (3 marks)

(ii) Calculate the capacity ratio. (3 marks)

(iii) Calculate the production volume ratio. (2 marks)

(iv) Explain what is revealed by the efficiency and the capacity ratios. (2 marks)